Quote from kalashnicac:
OK
1) & 2) OK. But when you buy a k/i put and a k/o call, you have long gamma/vega with the put and short gamma/vega with the call-correct me if I'm wrong. One option offsets the other...
Besides, being long put/short call on vanillas is high leverage too. If there is an underlying position in the opposite direction, there is no unbounded risk.
3) With forex options, you get to pick your strike and expiration as well. Got your point about no vega hedging being required.
Yes that's why you have been hedging your Dax exotics so actively, I imagine.
The similarities end with greek-sign. There is no leverage in vanilla risk-reversals or conversions, beyond what is seen to 100d. It's only slightly more advantageous than being long or short stock under RegT.
Placing a binary event dramatically increases gearing. There is simply no way to replicate the leverage:notional exposure with vanilla options. Consider the following: DAX cash is trading 4910 and you're looking to trade a bear-delta position into what you believe is an imminent-drop in equity valuations. You buy a barrier-k/o range struck at 4925 and 4775. The gamma surface looks like the dark side of K2. It's vertical. The position is incredibly cheap due to the gamma-position. You're 15 points away from the upside event in which you lose your entire debit. You can trade the barrier k/o so cheaply since the $risk is inverse to gamma position/vega and the binary-risk. It would involve more vega with longer-term expirations.
